Financial

The recent rise in crude oil prices to levels not seen since late 2014 certainly has captured everyone’s attention, and generally boosted the financial prospects for U.S. producers and midstreamers alike. But while it’s often said that a rising tide lifts all boats, the fact is that accurately assessing the relative value of — and prospects for — specific midstream energy companies requires a deep, detailed analysis. Where are their assets located? How do they complement each other? Do their contractual obligations help or hinder? Sure, things may be looking up in the midstream sector in a big-picture sense, but that hardly makes every midstream company a winner. Today, we review highlights from a new East Daley Capital report that shines a bright light on 28 U.S. midstream companies.

The U.S. exploration and production (E&P) sector roared out of the starting gate in 2017 with a new optimism that fueled a more than 40% surge in capital investment. First-quarter results were strong, but an ebb in oil prices and some operational headwinds significantly lowered results in subsequent quarters. When final 2017 results are tallied in the next few weeks, the industry is on track to record its first profitable year since 2013 after posting more than $160 billion in losses in the 2014-16 period. The critical question is whether E&Ps are regaining the momentum that could drive a steady increase in profitability in 2018. Today, we analyze the clues contained in third-quarter 2017 results.

EnLink Midstream Partners LP, seeking to offset declining natural gas production in the Barnett Shale — where the master limited partnership (MLP) has extensive midstream holdings — has been implementing a strategic plan focused on acquisitions and expansions in the burgeoning STACK play in central Oklahoma and in the Permian’s Midland and Delaware basins in West Texas. The level of investment the plan requires has prevented increases in the MLP’s distributions to unit holders for nine consecutive quarters, which in turn has left EnLink’s share price languishing at about half of its 2014 high. The MLP has reported promising signs of growth in Oklahoma and the Permian as well as increased utilization of its southern Louisiana infrastructure, which it says could lead to a higher distribution to unit holders in 2018. Today, we preview our Spotlight Report on EnLink, which provides a detailed analysis of the company’s business segments to determine if its strategic plan will indeed generate real growth over the next four years.

As a volatile 2017 nears the finish line, the big question for U.S. exploration and production companies (E&Ps) is whether they will throttle back their capital expenditures in 2018, cruise on at the same pace or step on the accelerator. We won’t have all the answers for a couple of months, but early guidance issued along with third-quarter 2017 earnings results indicates a solid 14% increase in investment by seven oil-weighted and diversified producers. The big story among this handful of announcements is a 22% gain in planned 2018 capex by giant ConocoPhillips, which had been slashing investment since 2014. The company’s $2 billion capex boost includes doubling spending on its North American unconventional portfolio. Preliminary guidance for the natural gas producers, on the other hand, tells a different and less interesting story. Six companies, two-thirds of the nine gas-weighted E&Ps we’ve been tracking, indicate their 2018 investment will be relatively flat with the preceding year. So today, we focus on the 2018 plans of the oil producers and take an in-depth look at the ConocoPhillips budgeting process and the company’s noteworthy investment increase.

At times in the past, exploration and production companies (E&Ps) have been viewed as the riverboat gamblers of U.S. commerce. Given the right market signals, producers have been known to go “all in,” tapping credit markets in the equivalent of pawning grandma’s jewelry to win big by filling an inside straight. And, of course, they’ve sometimes paid the bitter price when commodity markets dealt the inevitable bad hand. So, the obvious question when prices and cash flows dipped earlier this year after producers raised capital investment by an average 40% is whether this is déjà vu all over again. Is the industry once again piling on too much debt? Today, we look at the debt levels of the 43 U.S. E&Ps we’ve been tracking.

Despite some hints that U.S. exploration and production companies are slowing some of their drilling in high profile shale basins — including last week’s decline of 15 operating rigs in the Baker Hughes count, our analysis of 43 representative E&Ps suggests that more than half expect their upstream capital spending in 2017 to exceed cash flow — a definite sign of optimism — and one fifth of the E&Ps will outspend cash flow by more than 50%. Is this a case of rose-colored glasses? Blind faith? Or have E&Ps’ post-price-crash efforts to high-grade their portfolios and improve their operational efficiency given them well-deserved confidence that if they don’t “back down” on capex things will turn out well? Today, we analyze the cash flow versus the capex of 43 U.S. E&Ps and discuss what it all means.

Despite a decline in natural gas prices, the nine gas-focused U.S. E&Ps we’ve been tracking fared better from a financial perspective in the second quarter of 2017 than E&Ps that concentrate on crude oil or have a diversified mix of oil and gas production. All nine companies in the Gas-Weighted Peer Group stayed in the black — no small feat — but with lower commodity prices the peer group’s profits fell 28% from the first quarter to just under $1.4 billion. Will 2017 be the gas group’s first profitable year since 2014? Today, we analyze the results for our gas-focused peer group as a whole and for individual companies within the group.

The 13 diversified exploration and production companies we’ve been tracking would have posted second-quarter 2017 pre-tax operating profits of more than $4.8 billion — $1.1 billion more than their profits in the first quarter — if ConocoPhillips, the largest of the 13, hadn’t taken a $6.3 billion write-down in the value of the company’s crude oil and natural gas assets and registered a nearly $2.8 billion second-quarter loss as a result. With an outlier radically skewing the group’s numbers, it’s best to put our baker’s dozen diversified E&Ps into two baskets — one for the 12 that didn’t take any significant impairments and the other for the lone E&P that took a huge one — and analyze each basket separately. Which is what we do in today’s blog.

After posting a whopping $160 billion in losses in 2015-16, the 43 exploration and production companies (E&Ps) whose financial performance we’ve been closely tracking roared back to profitability in the first quarter of 2017 on higher commodity prices and cost savings from drilling efficiencies on high-graded portfolios. However, lower oil prices slowed the earnings train in the second quarter, as total adjusted pre-tax operating profit dropped 11.6% to $8.0 billion. Understandably, the 21 oil-focused producers in our universe suffered the biggest impact from depressed crude realizations, reporting a 29% decline in operating profits to just $1.9 billion. The good news is that oil peer group earnings remained solidly in the black, increasing the odds that 2017 will be their first profitable year since 2014. Today, we analyze the results for the individual companies in our Oil-Weighted Peer Group.

The 43 U.S. exploration and production companies (E&Ps) we’ve been tracking racked up $160 billion in losses in 2015-16, but they turned things around in the first quarter of 2017, posting profits of $9.1 billion, or $9.12 per barrel of oil equivalent (boe), during that three-month period. At first glance, the second quarter might seem like a return to tough times; profits by the group fell more than 80%, to only $1.7 billion, or $1.71/boe. However, when $6.3 billion in impairments by ConocoPhillips ­­­­— most of them tied to $16 billion asset sales and a write-down of the Australia Pacific LNG project — are excluded, second-quarter profits by our universe of Oil-Weighted, Diversified and Gas-Weighted E&Ps totaled $8.0 billion, or $8.02/boe, a decline of only 11.6% from the first three months of 2017. Today, we begin a review of E&P performance and profitability with a big-picture look at key elements of their income statements.

An analysis of mid-year 2017 guidance shows that the nine natural gas-focused exploration and production companies we’ve been tracking are still fully committed to the very aggressive exploration and development spending they outlined at the beginning of the year. These Gas-Weighted E&Ps slightly upped their total 2017 capital budgets to $8.87 billion, a whopping 59% boost from their 2016 investment — well above the 44% and 29% increases announced by the Oil-Weighted and Diversified E&P peer groups, respectively. The gas-focused producers also increased their 2017 production guidance by 1% to 1.046 billion barrels of oil equivalent (Bboe), in contrast to the mid-year reductions in 2017 output announced by the other two peer groups. Today, we continue our review of updated capital spending plans by 43 U.S.-based E&Ps, this time with a look at companies that focus on natural gas.

Even with a double-digit percentage decline in crude oil prices since their initial capital spending budgets for 2017 were set, the 13 diversified U.S. exploration and production companies (E&Ps) we’ve been tracking are trimming their spending plans for the year by only $300 million, largely keeping in place $19 billion in drilling and completion investment. The Diversified Peer Group’s apparent confidence flies in the face of eroding investor sentiment as the median enterprise value per barrel of oil equivalent (boe) of reserves has declined 23% since year-end 2016 to $13.72/boe. Today, we review the changes in the outlook for the Diversified Peer Group’s upstream capital spending plans and update their expectations for 2017 oil and natural gas production.

Over the last year or so, Plains All American Pipeline — a large, crude oil-focused master limited partnership (MLP) — has twice made significant changes to its corporate structure and distribution process to free capital to fund organic growth, reduce debt, and strengthen distribution coverage. The changes are efforts to fix a problem: As oil prices plunged, PAA’s distribution coverage fell below 100% in 2015 and 2016, forcing the company to add debt and issue equity to raise cash. An initial restructuring that Plains undertook in mid-2016 included eliminating the incentive distribution rights (IDRs) payable to its general partner — the IDRs had been draining $620 million per year. (For more on IDRs, see Changing Horses in Midstream.) The change resulted in a 21% reduction in the distribution to limited partners as PAA set a minimum annual distribution coverage target of 115%. But plunging profits from the company’s Supply & Logistics segment eroded its coverage to 99% in 2017, triggering another comprehensive review of how it calculates its distribution. In late August, Plains announced a 45% reduction in the annual distribution, from $2.20 per unit to $1.20 per unit, and said it would base future distributions only on the results from its fee-based Transportation and Facilities segments. Today we preview our new Spotlight Report on Plains, which provides a detailed analysis of the likely future performance of all three segments of this major midstream MLP.

Hurricane Harvey and major flooding in Houston and other areas may affect energy markets and lead the 21 exploration and production companies in our Oil-Weighted Peer Group to readjust their 2017 investment programs. But in the weeks leading up to the Lone Star State’s most catastrophic weather event in decades, these E&Ps remained committed to their sharply accelerated 2017 capex plans. Their updated guidance issued with first-half 2017 earnings releases reveal a 44% increase in 2017 capital spending over 2016’s level to $26.5 billion, only a 2% reduction from the $27 billion initially budgeted for this year. The peer group also stayed confident in the long-term profitability of the major U.S. resource plays, which are receiving 80% of their 2017 capex, despite investor concern about lower prices that have triggered a 23% decline in the median enterprise value per barrel of oil equivalent for the Oil-Weighted peers since December 2016. Today we continue our review of updated capital spending plans by 43 U.S.-based E&Ps, this time with a look at companies that focus on oil.

Despite a 12% decline in crude oil prices from their December 2016 highs, the 43 top U.S. exploration and production companies (E&Ps) we’ve been tracking are largely maintaining their aggressive 2017 drilling and completion capital spending plans, announcing a mere $1.0 billion — or 1.5% — decline in total investment since the plans were unveiled. The industry’s apparent confidence in the long-term profitability of its aggressive development of the major U.S. resource plays is in sharp contrast with eroding investor sentiment that has driven Standard & Poor’s (S&P) E&P Index 29% lower than its late-2016 peak. The companies that announced modest investment reductions — about one-third of our universe of 43 E&Ps — cited cost savings from increased drilling efficiency and divestments as well as the lower short-term price outlook as reasons for the cuts. Today we review the changes in the overall outlook for 2017 upstream capital spending and oil and natural gas production, and take a quick peek into our three peer groups: those that focus on oil, those that focus on gas, and diversified E&Ps.